Five Things That Caught My Eye Today

1. Electronic Arts is rumored to be closing Pandemic Studios. Yes, this is the same Pandemic that, along with BioWare, EA paid more than $800 million for two years ago. Although Pandemic was behind Full Spectrum Warrior, one of my favorite games of all time, its recent efforts, like last year’s Mercenaries 2, were met with lukewarm critical reviews.

2. Stunning photograph of a crescent Earth shot by Rosetta, the European comet-chasing spacecraft. Oh yeah, and irregularities in Rosetta’s flight path may lead to a re-writing of the known laws of physics.

3. Fascinating profile of Jon Huntsman, Jr., Obama’s new (Republican) man in China. In an awesome historical twist, Huntsman as a child handed Henry Kissinger his briefcase as he departed with Nixon on the famous secret trip to China in 1971.

4. Intel’s Itanium chip finally turns a profit. After a decade. And billions of dollars of investment and promotion.

5. And from The Onion video files: Ultra-Realistic Modern Warfare Game Features Awaiting Orders, Repairing Trucks.

Are Publishers Really Selling More on PS3 Than Xbox 360? No.

Last week, one of the biggest video-game publishers, Electronic Arts, reported quarterly results. In its reports, the company always gives a breakdown of revenue by gaming platform. Several enthusiast outlets, such as MCV, reported that EA’s revenue from PlayStation 3 games was bigger than that from Xbox 360 games. This would be unusual since the Xbox 360 installed base is substantially bigger than the PS3 installed base. In fact, Xbox 360 game sales continue to outpace those for PS3. Here’s why.

(Full disclosure: I work for Microsoft’s Xbox division and have no formal training in accounting or financial analysis. What follows is my understanding of the situation based on my 12 years as a business, technology and economics reporter for Reuters, and on recent informal conversations with financial analysts who cover the video game industry. This is also my personal opinion and does not reflect the view of my employer.)

Publishers report two sets of numbers in their quarterly reports: GAAP and non-GAAP. GAAP stands for Generally Accepted Accounting Principles, the set of rules that U.S. companies must follow when reporting financial information. The intent is to give investors and regulators a set of consistent, objective data that is comparable across companies and industries. But due to the circumstances of each industry, GAAP numbers often obscure, rather than illuminate, what is happening with an underlying business.

First, let’s look at EA’s GAAP revenue numbers for each platform (A side point: these are revenue or sales figures, not profits. Some reports have confused the two terms. Profit is what is left after a business deducts operational, marketing, administrative and other costs from its sales).

Wii: $161 million
PS3: $121 million
Xbox 360: $73 million

Sure enough, it looks like PS3 games are outselling Xbox 360 games. But here’s the twist. Because so many games now include a substantial online component that is maintained for several years, GAAP rules require a portion of revenue from the initial sale be booked over the life of the online service. So, in a purely hypothetical example, let’s say a $60 game is deemed to have half of its value come from online play. The company will then book $30 over a period of, say, two years, or $3.75 per quarter.

Game companies aren’t the only ones who do this. Apple does it with the iPhone because it delivers ongoing updates and services to the device. So of the $200 you pay for an iPhone, Apple records $25 of that each quarter for two years.

The thing is, this all happens purely on paper. In reality, EA gets that entire $60 all at once, and your $200 for an iPhone goes straight into Apple’s cash pile. Analysts pretty much ignore these GAAP numbers because they want to know what total unit sales were and what total revenue was. Indeed, here’s a line from The LA Times’ coverage: “Most Wall Street analysts say they pay attention to EA’s non-GAAP accounting as a measure of its financial performance.”

So let’s revisit EA’s numbers and look at the non-GAAP statement, which takes out the effects of the deferred online revenue.

Wii:  $184 million
PS3: $99 million
Xbox 360: $136 million

So non-GAAP, the number Wall Street actually cares about, shows Xbox 360 sales still leading PS3 sales. I’m guessing, speculating really, that given that Xbox 360 has the more robust and active online network, that EA is forced to record a larger chunk of deferred revenue, revenue that will be recorded over the next couple quarters.

Interestingly, Activision’s numbers are somewhat different. Here are the GAAP numbers:

Wii: $118 million
PS3: $152 million
Xbox 360: $231 million

And the non-GAAP, excluding the effect of deferred revenue:

Wii: $74 million
PS3: $105 million
Xbox 360: $140 million

Again, purely speculating here, I wonder if the GAAP is so much higher because Guitar Hero sales have been so high for a couple years, and now we are seeing a huge surge in deferred revenue from those past sales.

Anyone have any insights here?

EA’s warning: What does it mean?

Yesterday, Electronic Arts warned that revenue and profit for the holiday quarter would fall short of its earlier estimates, also jeopardizing its financial targets for its entire fiscal year. Quoth EA CFO Eric Brown:

“[T]he majority of our portfolio is underperforming our sell-through projections. This fact, combined with the observation that some retailers are planning to end the calendar year with fewer weeks of inventory on hand, indicates that we will not have sufficient reorder activity in December to meet our Q3 expectations.”

The conventional wisdom is that the video-game industry is fairly resistent to recessions in the broader economy, so it’s fun to throw stuff like this at the CW and see if it shatters.

Sure enough, there are tons of news and blog reports wondering just how recession proof the industry is. A great example is the story in The Los Angeles Times that said the warning showed the industry “is starting to show signs of strain”.

Well, take a look at this chart of some key players in the video-game industry. One of these things is not like the other. Can you tell which one?

If you picked “ERTS”, congratulations. Electronic Arts fell 12 percent today, the day after its warning. Yet its biggest competitor, Activision, was down only 1.2 percent. A few gaming companies were even up.

That tells me that the market reckons the problems EA is seeing are pretty specific to EA, and not to the industry as a whole.

In other words, retailers may be cutting back on restocking video games, but they are especially cutting back on video games made by EA.

We’ll get a better picture tomorrow when the latest monthly sales figures from NPD are released, but there are already many positive signs that business is holidng up:

• Nintendo said it sold 800,000 consoles in the U.S. in just one week.
• Two Microsoft executives, Entertainment and Devices CFO Mindy Mount and Interactive Entertainment VP of Strategy Shane Kim, both said in recent interviews that they are cautiously optimistic about the industry holidng up.
• Xbox 360 had a strong Black Friday showing with sales up about 25 percent from last year.

Interestingly, video game stocks have been getting hammered since mid-year. EA and THQ are both down nearly 63 percent since the start of September while Activision and Take-Two are both down about 42 percent.

That’s worse than the Nasdaq, which is down 30 percent, and worse than manufacturing and retail behemoths like GE (36 percent), Boeing (32 percent), Intel (30 percent), and Wal-Mart (11 percent).

The pessimistic view might be that the warning from EA is just among the first early signs of a disaster the market saw coming months ago.

The optimist might say that EA is just a blip, that gaming shares have been unfairly tarnished amidst the broader economic troubles, that holiday sales will turn out fine for most companies, and that the stocks will rebound once the relative health of the industry is borne out by strong data.

What do you think?

Don’t bother me, I’m Sporing…

I picked up Will Wright’s latest game, Spore, yesterday. Wright created SimCity, one of my favorite PC games of all time, and The Sims, the best-selling game of all time with approximately 100 jillion copies sold. This is one story that I really wish I had remained a reporter long enough to cover. The reason is that Wright is supposed to be a brilliant guy, even a genius. He’s one of the gaming industry’s true deep thinkers and intellectual lodestones. He not only has an unsatiable appetite for knowledge, but he processes that knowledge in weird and wonderful ways. His creations are Miyamoto-like in their ability to extract something fun from the mundane.

In Spore, you start out as a microscopic organism and eat and discover your way up the evolutionary ladder, moving onto land, forming tribes, creating a civilization and finally conquering the galaxy. Not surprisingly, the game has been getting a lot of attention from the science press, who see a good cross-over story when they see it.

One of the best articles has come from Seed, which asks, “If this is the ultimate evolution simulator, why does it feel so much like intelligent design?” The answer, of course, is that while the game is inspired by science, it is in the end a game that is supposed to be fun. (Though not directly addressed in the article, I would add that publisher Electronic Arts, which delayed the game a couple times, really needs it to be a hit, so making the game as approachable as possible makes good business sense. Wright himself alluded to that in this Q&Awith MTV Multiplayer.)

I really liked this bit about people designing genitalia-inspired creatures:

For game designer Frank Lantz, it’s this evolving ecosystem that is the perfect example of the game’s ability to be science rather than teach science. Initially, it was living, bouncing models of the human reproductive organs that proved wildly popular — a trend quickly dubbed “Spornography.”

“Here’s a game — supposedly about evolution — in which sexual reproduction is tastefully absent,” says Lantz. “And then as soon as the editor comes out, there’s this enormous Cambrian Explosion, a Burgess Shale of digital erotica. And then those images were really good at reproducing themselves as players sent links and images around to each other. So, it turns out that sex is good at reproducing itself. How funny and ironic is that?”

The kicker line is great, too:

This isn’t a game for re-educating the intelligent design proponents of the present; it’s a game for inspiring the intelligent designers of the future. Because, of course, if you zoom back one more level from Spore and the computer screen which hosts it, what do you see? Yourself.

One other interesting twist to the buzz around the game is the reaction it is getting on Amazon, where reviewers pissed off over the draconian copy-protection have driven the game’s rating down to a single, solitary star.

I was going to break it down but why tell when you can show?

 

 

 

 

 

The bizarre twist on this is that EA was once on the other side of a similar campaign last holiday when the sci-fi epic role-playing game Mass Effectcame out. (The game was published by Microsoft but EA ended up buying the studio that made it and thus ended up being on the frontline of this particular crapstorm.)

What happened was that Fox News did a totally irresponsible and scurrilous segment about the game, which featured a brief, PG-rated love scene of the main character bedding an alien woman. One Fox commentator said the game was like “Star Wars meets Debbie Does Dallas“. Fox had an author named Cooper Lawrence on the show to criticize the game for its shallow depiction of women, but when asked by the pro-game commentator Geoff Keighley, she admitted she hadn’t played the game.

What happened next was that hundreds of outraged gamers flocked to Amazon and drove down the rating of Lawrence’s book. She ended up issuing an apology (though Fox never apologized for its blatant and willful misreporting that would have been the cause of an embarrassing correction and probable probation for the reporter if it had occurred at Reuters) and the whole saga was chronicled by The New York Times. In one of those fish-that-got-away stories, I actually had a story primed and ready to go a full day before The Times, but a miscommunication with editors meant it was overlooked. Oh well.

Anyway, it looks like the mob has turned against EA. Amazon ended up deleting the bulk of the negative reviews for Lawrence (though it looks like many have returned over time), so it will be interesting to see how they’ll handle this. On the one hand, it seems to be a legitimate gripe with the product. On the other, it’s clear many of the “reviewers” haven’t bought the game but are just parroting details they read elsewhere.

EA: The repentent Borg?

As the drama over Electronic Arts’ play for Take-Two drags on, one question is whether EA, should it be successful in its bid, would end up ruining “Grand Theft Auto”, cranking out yearly updates with an ever-lengthening list of ill-conceived features and steadily declining quality.

A year ago, the answer could easily have been yes. Today, though, there is convincing evidence to show that CEO John Riccitiello is out to rehabilitate EA’s reputation in the eyes of gamers. Two weeks ago, I wrote an analysis laying out the issues. Read on to see what EA has in common with ancient Greek politics, alien menaces, and whether shareholders will smile on his efforts.

   By Scott Hillis
    SAN FRANCISCO, April 4 (Reuters) – As it pursues its $2 billion offer for Take-Two Interactive Software Inc, Electronic Arts Inc is trying hard to prove it won’t drive the “Grand Theft Auto” video game series to mediocrity, a fate that has befallen some of its other acquired franchises.
    It’s an important theme in EA’s current takeover drama with Take-Two, home to some of the industry’s leading lights, including Rockstar, the crown jewel studio behind the upcoming “Grand Theft Auto 4.”
    The company has a spotty history in getting hard-won talent to stick around. Its 1990s acquisition of well-regarded studios such as Bullfrog, Westwood and Origin led to mass defections and the marring of once-proud franchises with ho-hum games.
    Chief Executive John Riccitiello, who rejoined EA a year ago after heading private equity firm Elevation Partners, acknowledged as much at an industry conference in February.
    “I would state simply that we at EA blew it, and I was involved so I can say I blew it,” Riccitiello said of past acquisitions that ended badly. “The command and conquer model, the command and direct model, doesn’t work.” 

A look at Metacritic

In addition to frequent blather, I am hopefully also going to use this site to showcase a bit of my work at Reuters and to expand on it in a totally these-views-do-not-represent-Reuters-and-are-solely-those-of-the-author kind of manner.

Here’s an easy way to kick things off. 

My Gameworld column last week focused on Metacritic and how its scores have become so influentual in the U.S. video game industry.  It’s certainly a topic that has been covered before, much to the surprise and delight of the site’s original founding trio. The peg for my story, however, was EA’s recent analyst day. It was fascinating to hear the CEO and other executives of the industry’s biggest comapny obsess over how their products scored on Metacritic.

I intend to follow this up with some additional thoughts on why Metacritic has emerged as such a force. But that will have to wait until tomorrow, as I have 6 hours, 49 minutes and counting until I have to get up.

By Scott Hillis

SAN FRANCISCO (Reuters) – John Riccitiello, head of Electronic Arts, is showing a chart to Wall Street analysts and he is not happy.

This chart, Riccitiello grouses, shows the one metric that has most frustrated him since he took over the world’s largest video game publisher nearly a year ago.

It doesn’t show the company’s falling operating profit or sliding market share. Instead, it shows the average score for EA’s video games on Metacritic.org, a Web site that distills a pool of reviews for a given game down to a single number.